Wednesday, May 22, 2024

ConAgra builds inventory to restore service levels

Conagra highlights lower level of supply chain disruptions

CPG has been one of the industries most acutely impacted by lingering supply chain issues since the pandemic began. Many of those issues appear to be moderating — there have been fewer reports of CPG being short of particular ingredients or packaging materials, and service metrics are improving. Most people would view those things as a positive, but I’m an exception — I’ve had to work harder to find topics for this newsletter. 

On Wednesday’s earnings call, Conagra Brands highlighted moderating supply chain issues as well as other noteworthy trends. I expect to hear similar things from other publicly traded CPG companies as they report earnings: 

Elasticities continue to be “muted” — or at least no worse than historical levels, which the company pegs at 0.54. (A 0.54% sales volume decline is expected for every 1% price increase.)

Inflationary pressure on cost of goods sold has moderated as a growing number of supply chain issues have been alleviated.

Moderating cost inflation is helping margins continue to recover to pre-COVID levels. ConAgra’s gross margin in the calendar fourth quarter was only 34 basis points below the fourth quarter of 2019, whereas much of its peer group has margins that are a few hundred basis points below pre-COVID levels. 

Service metrics improved to 93%, which is an indicator that the company’s supply chain is improving, but it is not fully back to normal. ConAgra is building inventory levels to keep service levels above 90%. (CPGs and consumables have not had the same inventory overhang of the discretionary consumer segments.)

FTC investigates alcoholic beverage distributor

(Image: Shutterstock)

The 1936 Robinson-Patman Act prohibits product manufacturers from offering better prices to large retailers than local mom-and-pops. It has rarely, if ever, been enforced in recent years. That could change based on the objectives of the Biden administration and the current iteration of the Federal Trade Commission (FTC) to enhance competition. To that end, the FTC opened an investigation into Southern Glazer’s Wine and Spirits, the largest distributor of alcoholic beverages in the U.S. Similarly, the FTC opened an investigation into the wholesale pricing practices of Coca-Cola and Pepsi in January. While it’s unclear whether those investigations will result in any penalties or settlements, just the threat of action on a previously dormant law could change consumer goods companies’ pricing practices to make them more compliant with the letter of the law.

FDA hears comments on potentially banning Red No. 3 food dye

(Image: Shutterstock)

Consumer advocacy groups have long wanted to ban food dyes that produce artificial colors. After years of unsuccessful attempts, the Center for Science in the Public Interest may be gaining traction on one dye in particular — Red No. 3. What’s different about Red No. 3 is that it has been banned for use in cosmetics since 1990 after testing on animals in the ’70s and ’80s showed a link to thyroid cancer. At that point, it had already been approved by the Food and Drug Administration for use in foods and has remained in use. The FDA is concerned enough that it is now hearing comments from impacted parties before potentially issuing a ruling. Regulators in California are also looking into the issue with the potential that the standard in the state will be stricter than the national standard, which could complicate CPG supply chains. In 2015 and 2016, numerous CPGs committed to removing artificial flavors and colors before backing off those commitments, citing consumer preferences for original formulas. This time, under possible new FDA regulations, CPGs may actually have to make greater use of natural colors in their supply chains, even if it makes red candy and cereal less vibrant.

The post ConAgra builds inventory to restore service levels appeared first on FreightWaves.

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